As a couple, financial planning often gets put on hold. Life gets in the way, particularly if children come along. If one partner stays at home to look after the children, their pension contributions may stop, insurance policies may lapse, and savings can be eaten into. For the main breadwinner, their focus becomes meeting the expenses of the here and now, rather than planning for the future.
When it comes to financial planning, I’ve found that women often have a very different approach and requirements than men. But as a couple, undertaking some careful planning together, taking into account both situations and points of view, often has a significant and positive impact on a couple’s long-term lifestyle and prospects.
A Different Perspective
In my experience, women approach financial planning from a different perspective than men. Although most women tend to have a strong desire to know that in the long-term everything is going to be ok, they still tend to put their own financial needs last.
I also find that women want a financial adviser who understands and can relate to their needs and who isn’t going to produce endless statistical charts with little meaning when it comes to the bigger picture. Unfortunately, this means the image many women have of financial advisers steers them away from seeking advice.
For women, the lifestyle planning process tends to be very important, as does lifetime cashflow planning software which can visually demonstrate that, financially, they’re secure and will be able to weather any storms.
It’s important to carry out any financial planning exercise together, holistically, as a couple. A man’s perspective is no less important than a woman’s or vice versa, but it’s the combination of the two makes a financial plan truly complete.
Working with both partners, financial planners can plug any gaps or weak spots, ensure families have the right financial protection, and line up the family assets so that they perform and grow as well as they possibly can.
The Foundation – Insurance
Women in particular are often under-insured, and that’s potentially hugely problematic. If something should happen to the main caregiver, be it serious illness or worse, ensuring that you have financial security and minimum disruption for the children has to be a priority. If you don’t have appropriate insurance, you’re taking a huge gamble with your family’s future.
This means that as far as I’m concerned, life insurance and critical illness cover are the starting point and cornerstone of all good financial planning. I often also find as part of this process that the husband is also under-insured, so we tackle that too.
By way of example, with one couple that I was working with, we effected a family income benefit policy which meant that if either of them died or suffered a devastating critical illness, a regular income would be payable to the end of the term.
We set the term to coincide with the youngest child finishing education, to ensure that at a time when education fees were being funded out of income, that the carefully thought out private educational plan would continue. This provided immense peace of mind to the family who were keen that if anything untoward was to happen, the children would not have to change schools during a difficult time.
Number Crunching – Pensions
According to the latest research from the Office of National Statistics (ONS, September 2018), women are still living longer (82.9 years) compared to men (79.2 years), which means women need to accumulate more in terms of pension wealth to see them through their later years.
The Scottish Widows Women and Retirement report 2018 also recently revealed that nearly half of all women are still not saving enough into their pensions, often due to ‘Maternity leave, reduced working hours, childcare costs or caring for an elderly relative [which can all contribute] to the gender pensions gap by holding back women’s earnings potential and leading to intermittent retirement saving in those all-important early years.’
Other research from the ONS revealed that as at the end of the first quarter of 2018, men with dependent children were still significantly more likely to be employed (93.1% employment rate) than women (74% employment rate), although the same research also showed that three quarters of couples with dependent children both have some form of employment, even if it’s only part time.
Making Smaller Adjustments for the Longer Term
Planned early enough, it is possible and often tax-efficient to mitigate the impact of this reduced saving. It might be a question of making additional pension contributions in the early years (before, during or after parental leave), ensuring contributions are continued even when one partner is on a career break (possibly by setting up a Personal Pension plan) or exploring other ways to ensure that both partners have sufficient pension savings.
One or both partners may have multiple pension pots and it’s important to look at whether it would be sensible to consolidate these. Finally, failing to claim Child Benefit can have a negative impact on a State Pension
At our annual client reviews, we always ensure we have State Pension forecasts. We can then establish whether there is likely to be a shortfall. Paying a top up to fill gaps can on average generate around an additional £4.80 per week and the annual top up fee is usually around £780 (from April 2019). That means in approximately 3 years the top up for non-taxpayer has paid for itself.
Other considerations when it comes to pensions are the Annual Allowance (the most you’re allowed to contribute to a pension each year whilst still receiving tax relief) and the Lifetime Allowance (the amount you can withdraw from a pension each year without triggering an additional tax charge). If the main breadwinner is at risk of exceeding either of these, reorganising how funds are allocated could result in both significant tax savings and improved pension provision for the lower-earning partner.
When one partner is the main breadwinner, valuable tax advantages and opportunities are often missed. For example, one partner may have an unused Income Tax allowance whilst the other is being taxed at a higher than necessary rate, or the couple may not have taken full advantage of their Marriage Allowance.
Another example occurs when a non-tax paying partner has accumulated some pension funds in their own right during their working years. In these circumstances, and if the non-taxpayer is over 55 but under State Pension age, it can more tax efficient if the pension savings are used instead of the other partner drawing down and paying Income Tax.
In effect, the non-tax paying partner draws down an amount equivalent or under the Personal Allowance of £12,500 thereby creating a tax efficient stream of income. Of course, this works only in circumstances where clients need to access the pension as other forms of savings do not exist or where passing the pension on is not a priority.
If there’s a family business of which one partner is the owner, there are a number of different methods of tax-efficient profit extraction that also need to be considered, from the payment of dividends to making Benefits in Kind payments to help with expenses.
Risk Management – Ongoing Planning
Life is inevitably unpredictable – from an unforeseen illness or expense to the fluctuations of the market. And that means, that when it comes to your finances, you should always have in place some form of risk management.
As a financial planner and adviser, I very much see myself in that role. If you have a clear financial plan and set of objectives, then it’s important to keep those under review, to ensure that you stay on track, even with life’s many unexpected events. We do that with an annual review, at which point we can make any required tweaks and adjustments.
Risk management takes many forms, one of which is in the case of high earners (earnings in excess from £110,000 to above £210,000) where pension contributions are tapered from £40,000 to only £10,000 pension contributions being allowed each tax year. Exceeding the maximum allowable pension contributions without proper tax planning and management can result in a very nasty tax bill!
It’s also important that as your financial adviser, I understand your attitude and potential to withstand risk, so that the growth and management of your portfolio never strays out of your financial comfort zone. With all that comes peace of mind that you can withstand life’s crises and that in both the long- and the short-term, financially, you’re going to be ok.
Much has been written about the psychology of both men and women when it comes to financial planning. But as I said at the start, it’s the combination of the two different perspectives which not only brings vision, depth and completeness to a financial plan, but can also help ensure tax-efficiency and intelligent asset growth.
This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This article is based on paying Income Tax and National Insurance at 2019/20 rates and excluding any other deductions such as pension contributions.